Case: Dell, Inc.Push or Pull?

This case was written based on various published stories about Dell and inspiration from the toolbox of the Council of Logistics Management.

The Brief History of Dell's Postponement Strategy

Postponement is the act of delaying or putting off products or service, which seems counterintuitive when a company wants to achieve high levels of customer service. Yet, postponement is a key element in the business model that helped Dell, Inc., thrive in the increasingly competitive personal computer (PC) market in the U.S., with more than $56.9 billion in 2013 annual revenue (http://www.sec.gov/Archives/edgar/ data/826083/000082608313000014/dell10-kafy2013.htm, Dell Inc. 2013 Form 10K). Dell, Inc., is the namesake and brainchild of Michael Dell, who started his computer business in 1984. Dell's years of success are attributed to its once innovative business model that pioneered the idea of selling and distributing products directly to its customers without relying on brick and-mortar store sales. When it first entered the PC market, Dell chose to sell directly to end customers as well as businesses primarily over the Internet or by telephone. Dell's website allows the customer to select specific models and options as well as the preferred method of payment and shipment without direct personal contact. After the order is placed, the customer can access the Dell website and check the status of his or her order at any time. Once the order is confirmed, Dell acquires the parts/components and builds the PC to each customer's specific needs/ options, shipping the finished goods directly to the customer. This order fulfillment process is different from the traditional practice of building PCs and stocking them with the anticipation of future orders. Thus, Dell does not have to deal with inventory headaches and offers customers the convenience of shopping online with the paperless online order form. In this business model, Dell lets the customer decide exactly what he or she wants, how soon he or she needs it, how he or she wants the order shipped, and how he or she wants to pay, rather than "pushing" their pre-made products into the customer's hands without many options.

Supply Chain Strategy A key element of Dell's business strategy is the use of "voice of the customer," which allows the customer to play "what-if" scenarios with prices and features until he or she is satisfied with the ultimate valuea combination of product configuration, price, and service (ordering, delivery, and post-sales). Also, to add value to the PC that a customer wants, Dell engages its entire organization in transforming "end-to-end" supply chain practices, from the traditional retails sales/distribution to customer-direct sales/ distribution.

Dell only needs inventory in partially completed PCs (parts/components) during the preconfiguration stage, but not in finished products throughout its supply chain. To further reduce the burden of holding parts/components inventory, Dell requires its suppliers to keep inventory on hand in its small warehouses (called "revolvers") or supplier logistics centers (SLCs) that are located within a few miles of Dell's assembly plants. Each of the SLCs is shared by a group of suppliers who pay rent for using this facility. Because each PC is assembled after the sale, there is little dead stockthat is, inventory that is outdated or poorly configured and therefore is never sold to customers. More importantly, before the delivery of the ordered PC, Dell has already been paid via credit card, so its cash flow has been

dramatically improved. Dell's gains from this non-traditional business model have been impressive: lower inventories and the subsequent high inventory turnover; elimination of the reseller's markups; quicker customer response; and faster cash-to-cash cycle time. According to CSIMarket. com, Dell turned its inventory 97.54 times at its peak in 2004 and averaged 54.49 during the past decade. Its inventory turnover ratio is the second highest in the computer hardware industry as of 2013. Its average inventory turnover is five times higher than its biggest rivals, such as Hewlett-Packard (HP), which registers an average inventory turnover ratio of 12.15. There is no magic or secret behind Dell's success: Instead of stretching its supply chain through a retail distribution channel in finished form, its inventory consists of parts/components whose assemblies will be postponed until the customer orders a PC with optional features he or she really wants. This postponement strategy allows Dell to establish pricing points for each model and type of computer. With lower supply chain costs, Dell can offer competitive prices to its customers while still using high-end components such as the Phobus gaming/home theatre system.

Changing Times In the fourth quarter of 2008, Dell still enjoyed success with a reported quarterly revenue of $16 billion, but fell short of the expected earnings for a company that was once at the pinnacle of the industry. Ever since, Dell has continued to slide in its market share and profit margin. For example, after losing its market leadership to Hewlett Packard in 2007, Dell's share of the worldwide PC market fell from 14.2% to 13.2% between 2007 and 2008 and its share of an already contracting PC market slipped to just 10.7% in 2012, from 18.1% in 2001 (Gartner Group, 2009; De La Merced and Hardy, 2013). Although Dell's recent struggles were affected by a multitude of factors, including the acquisition of EqualLogic, Alienware, Everdream, and Perot Systems; severance payments; and a worldwide economic downturn, Dell has been subject to a litany of cost- and productivity-related issues that most of us never saw coming over the last few years. To address these issues, Dell continues to lay off workers amid global restructuring and recently announced that it would cut 2,000 to 3,000 people from its payroll. It also closed its desktop manufacturing facilities with the hopes of reducing expenses as much as $3 billion a year. In addition, Dell is looking to update its product design, compress manufacturing cycles, increase investment in cloud computing technologies, get new product to market quicker, and develop new high-value clientfocused software, peripherals, and services. Leveraging a 36% rise in combined sales in Brazil, Russia, India, and China (BRIC), Dell tries to exploit emerging markets and focus on notebook sales to boost both revenue and profit. Despite these efforts, Dell is still concerned about its shrinking market share in the worldwide PC market. As of the third quarter of 2014, Dell's archrival, HP, is the world leader with 19.8% of the market share, whereas Dell ranks third with 12.8% market share, behind Lenovo's 17.9% market share (Statistica, 2014). So, what caused the recent trouble for Dell? Did it stem from its rising research and development (R&D) costs for rapidly changing technology? Was it because Dell was unaware of market changes and relied too heavily on its old trick of selling direct to customers in changing times? Or was it simply that Dell's popularity has run its course and HP realized what consumers want today before Dell did? In fact, Dell's rivals (HP, Apple, and Acer) have already duplicated some of Dell's postponement ("push-pull") strategies and became more competitive than ever before. As such, Dell's old trick of selling direct to customers no longer works well, and its market share has dwindled in the last several years. Dell began to realize that its iconic but old business model should be changed because consumers suddenly are more likely to buy a PC at their

local retail outlet (e.g., Best Buy, Sam's, or Costco) than ever beforethe rationale being that online purchase and call-center support might leave some customers uncertain of what they will actually get. To regain its strong foothold in the dynamic PC market, Dell was forced to start selling its PCs in retail outlets (such as Walmart) again after abandoning such a marketing strategy in 1994. Dell is now selling its PCs in about 10,000 retail stores worldwide, including Carrefour and Tesco. However, some management experts believe that the company was too lateHP already owned that brick-and-mortar market with its long ties to discount retail giants such as Sam's and Costco. Another challenge faced by Dell is the fact that the computer industry has quickly become a commoditized business, where a Dell PC is virtually the same as an equally equipped HP product. Therefore, Dell was often forced to engage in price wars against its rivals. With a dwindling profit margin in the PC industry, Dell is fighting an uphill battle to stay competitive and remain profitable. As a professional consultant for Dell, you would like to help the company avoid any more trouble on the horizon and develop innovative ways to entice both past and new customers. List and justify your specific recommendations for Dell with its pros and cons. Prior to making these recommendations, you should consider the following dilemmas first:

1. Why does the direct sales model that worked so well in the past no longer work these days?2. Does the simultaneous use of multiple sales/distribution channels (e.g., direct online sales and sales through retail stores) channel conflict?

3. What are the potential problems associated with traditional retail sales? 4. What managerial changes have to be made to regain market share and become a global leader of the PC industry?

5. How can you make Dell's supply chain more resilient than ever before?